3.4 Market structure

Question 1

what is economic efficiency?

Answer 1

optimal allocation of scarce resources to help satisfy changing wants and needs

Question 2

what is allocative efficiency?

Answer 2

when the cost people are willing to pay is the same as the cost the good costs to make - market cost = marginal cost of production,
AR=MC

Question 3

what is productive efficiency?

Answer 3

when firms have reduced costs so they aren’t wasting resources and so is operating at the lowest point on the cost curve = this occurs when AC=MC
(all economies of scale are exploited)

Question 4

what is dynamic efficiency?

Answer 4

when a business successfully meets the changing needs and wants over time
- depends on if markets has rapid innovation

Question 5

what is social efficiency?

Answer 5

same as allocative efficiency, when MSB=MSC
- because of negative externalities that the firm ignores it is not producing at the socially optimum point

Question 5

what’s creative destruction?

Answer 5

idea proposed by Joseph Schumpeter, dynamic efficiency causes innovation which causes some jobs to be lost while others are made like how new production units replace old ones = overall a good things

Question 6

what’s deadweight loss of welfare?

Answer 6

a loss in producer and consumer surplus due to an inefficient level of production

Question 7

whats pareto optimally?

Answer 7

someone will always be worth of as a result of trade

Question 8

whats X-inefficiency?

Answer 8

a lack of real competition, often faced by monopolies, so they don’t have an incentive to invest in consumer welfare or production which can lead to inefficient production and high costs

Question 9

whats is a perfectly competitive market?

Answer 9

a market structure where assumptions are strong ➡️ unlikely in real world, used to compare to imperfect competition
examples - farmers

Question 10

what are the characteristics of a perfectly competitive market?

Answer 10

• identical/homogenous products
• all firms have same access to factors of production
• no barriers to entry or exit
• perfect knowledge by everyone
• large number of buyers and sellers who act independently
• economic assumptions ✅
• firms are price takers, no control over price of product

Question 11

when can profits be made in a perfectly competitive market?

Answer 11

in the short run, supernormal profits can be made as the price’s set by the demand
but
in the long run, can only make normal profits, this is because the supernormal profits attract new firms into the market which causes an outward shift in supply and every firm is making normal profits where AR=AC (these firms will then leave the industry causing market supply to shift inwards

Question 12

efficiency in perfect competition?

Answer 12

allocative efficiency (P=MC) is achieved in both short and long-term
❌
- dynamic efficient as homogenous products + lack of supernormal profits means firms can’t invest

Question 13

why are competitive markets good for the economy?

Answer 13

• lower prices because of many competing firms
• entry of new firms increases competition, keeping prices low
• lower profit margins than monopolies
• greater entrepreneurial activity
• high productivity +. avoid x-inefficiency

Question 14

why can perfect competition not happen in the real world?

Answer 14

• most firms have some sort of price-making power
• always differentiated/ branded products
• always info gaps for customers
• patents/ regulations etc
• assumes there are no externalities

Question 15

evaluation of perfect competition?

Answer 15

✅
- consumers aren’t exploited in terms of price
- consumers can all buy the same product
- no wasted costs in terms of advertising
❌
- consumers don’t have much choice
- firms are unlikely to be able to grow large enough to benefit from economies of scale

Question 16

what is monopolistic competition?

Answer 16

imperfect market structure, similar to perfect competition but more realistic as firms have some price setting power

Question 17

what are the characteristics of monopolistic competition?

Answer 17

• many buyers and sellers
• imperfect knowledge
• low barriers to entry and exit
• slightly differentiated products
• economic assumption ✅
• firms have little price-making power

Question 18

when can profits be made in a monopolistically competitive market?

Answer 18

• in the short run supernormal profits can be made, these supernormal profits paired with lack of entry barries causes new firms to enter the market ➡️ demand curve for existing firms shifts left as consumers buy new firms products (until AR curve in tangiable to the AC curve)
• in the long run the firms is at is profit-maximising output as MR=MC but is also only making normal profits

Question 19

to what extent does monopolistically competition lead to economic efficiency?

Answer 19

❌
allocative efficiency as prices are above marginal costs
productive efficiency as due to the saturation of the market businesses cannot fully exploit economies of scale
socially inefficient due to negative externalities of packaging etc
✅
dynamic efficiency, consumers have lots of choice so have to innovate

Question 20

what are the non-price strategies used by monopolistic competitive markets?

Answer 20

• online availability
• more sizes
• customisation of the product
• return policies for customers
• use of social media

Question 21

what are the characteristics of an oligopoly?

Answer 21

• top five firms dominate over 60% of the market
• high barriers to entry and exit
• lack of knowledge
• economic assumption ✅
• high level of market concentration
• each firms supplies branded products
• independent strategic decision making

Question 22

what is strategic independent decision making?

Answer 22

the actions/decisions/pricing of one firms are influenced by the likely action of competitors
- always a high level of uncertainty

Question 23

what is the concentration ratio?

Answer 23

• ratio of the size of the firm to the industry
• it measures the combined market share of the top ‘n’ firms
• if the 5-firm concentration ratio is greater than 60%, then we have an oligopoly

Question 24

is there normally collusive or non-collusive behaviour in an oligopoly?

Answer 24

non-collusive - idea that firms do not work together and instead they will compete with each other - collusive behaviour can be deemed illegal if they do not improve production, innovation of consumers' experience collusive - businesses in a cartel recognise their interdependence and act together (aim to maximise profits) - lowers the costs of competition eg advertising - reduces uncertainty - good when price inelastic demand - firms have to trust eachother ➡️ happens when there are low regulators or penalties on collusive behaviour

Question 25

why do price fixing cartels often break down?

Answer 25

- recession - entry of non-cartel buisness - over production within the cartel - whistle-blowing firms (snitches)

Question 26

cost of collusive behaviour?

Answer 26

- damages consumer welfare ➡️ higher prices, loss of allocative efficiency, hits poorer more - the absence of competition effects efficiency - reinforces the cartels monopoly power

Question 27

possible benefits of collusive behaviour?

Answer 27

- stablity with prices - profits have value, how are they used

Question 28

winners and losers of price wars?

Answer 28

winners - consumers - managers who may get better bonuses losers - shareholders if prolonged price wars lead to lower profits - suppliers if monopolies use their size - smaller firms who can't absorb the effect of low prices - the govt. is lower profits cause a decline in corporation tax

Question 29

what's limit/penetration pricing?

Answer 29

setting a low initial price to deter entry or the expansion of fringe firms to short run profit maximise (but above the competitive level)

Question 30

characteristic of a monopoly?

Answer 30

- a single supplier who dominates the market - working monopoly = over 25% of market total sales - dominant firm = has 40% of market share - Price-making power - high entry and exit barriers - economic assumptions 👌 - if AR is falling MR will fall twice as steeply, have to reduce price of all units not just one additional unit

Question 31

what is a natural monopoly?

Answer 31

when a large business can supply a market at a lower price than smaller ones ➡️there cannot be a more efficient provider of the good

Question 32

what is price discrimination?

Answer 32

when a business charges different customers different prices for the same product - 3rd degree discrimination = charging different prices to groups of consumers segmented by price elasticity of demand, income,age, sex ➡️ firms must have monopoly power, identify different market segments, prevent re-sale

Question 33

evaluation of price discimination?

Answer 33

✅ - lower prices for some who otherwise cannot afford it increases market share - more profits can result in higher dividends - businesses can make better use of spare capacity ❌ - increase regional inequality - increase in admissions cost - grouping of consumers is not perfect depends on - extent of its used - depends on how buisnesses choose to use their profits - difficult to find fair price

Question 34

economic efficiency of monoply?

Answer 34

- X-inefficiency ➡️ productive efficiency + price - fewer economies of scale - monopoly may get too big

Question 35

what is a monopsony?

Answer 35

a firm with buying or bargaining power in their market (singlebuyer) - this power can be exploited by forcing suppliers for lower prices eg - supermarkets - British sugar market - amazon - govt - NHS, military

Question 36

benefits to firms of a monopsony?

Answer 36

- allows bigger firms to achieve purchasing economies of scale leading to lower long-run average costs - lower purchasing costs would cause higher profits and increased returns for shareholders - extra profit can be reinvested

Question 37

benefits to consumer of a monopsony?

Answer 37

- can gain from lower prices if passed onto product price - improved value for money eg NHS can use its bargaining power to cut the prices of drugs used in treatment

Question 38

drawbacks from monopsony powers?

Answer 38

- reduced profits from firms in the supply chain (eg milk farmers battling to get higher prices from supermarkets to cover average costs) - less choice or higher markets if some suppliers are forced to leave the market

Question 39

what are the characteristics of a contestable market?

Answer 39

- low barries to entry and exit, allowing new suppliers to come in and make more competition - perfectly contestable = entry and exit costless - common when there is one or more dominant business characterised by the threat of competion eg - fast food - bookselling

Question 40

conditions required for market contestability?

Answer 40

- a pool of new businesses who are willing and ready to enter the market - no sign. entry or exit costs - equal access to industry technologies - high rates of customer switching (low brand loyalty)